Transfer Pricing — Functions, Assets, Risks, Methods and Comparables

An arm's-length analysis begins with the controlled transaction and what each party actually does. Identify functions, assets, risks, contractual terms, economic circumstances and business strategies. A group organisation chart and a target margin are not a complete analysis.

IRD's 2024 directive provides the methodological framework, while Finance Act 2083 adds statutory definitions and provisions. Read the 2024 directive with the applicable Finance Act 2083 amendments.

Choose the most appropriate method under the directive and transaction facts. CUP, resale price, cost plus, transactional net margin and profit split have different data and comparability needs. A method name does not establish a reliable result.

A Nepal distributor buys goods from a foreign related manufacturer. The review documents distribution functions, inventory and credit risk, marketing activities and rights. It then examines available uncontrolled prices or margins, relevant differences and the method supported by evidence. A foreign group's policy saying “all distributors earn 3%” is not a Nepal comparability study.

Define the tested transaction/party where appropriate, search strategy, filters, period, financial indicator and adjustments. Explain exclusions and retain reproducible data. A range derived from incomparable entities remains unreliable even if its arithmetic is correct. Do not remove low/high observations only to achieve a desired tax result.

Analyse differences and any proposed adjustment under the current law and directive. Distinguish price adjustment, disallowance and re-characterisation; authority and conditions can differ. Keep accounting and tax effects reconciled and consider withholding/FX consequences separately.

The file should connect contracts, actual conduct, financial segmentation, method, comparables, conclusion and disclosure. Update it when material facts change. This article outlines the methodology; a transaction-specific benchmark requires actual data, current statutory analysis and professional review rather than invented comparables.

Read the agreement alongside actual conduct. Identify who makes decisions, performs work, controls risk and owns or uses relevant assets. A contract allocating all risks to a distributor is not enough if another group member actually controls those risks. Use segmented accounts where the tested transaction represents only part of the business. Finance Act 2083 adds definitions relevant to associated persons for transfer pricing, including specified ownership/control, financing, intellectual-property dependence and supply dependence. Record the precise link instead of describing two companies as related merely because their names are similar. The ordinary section 33 analysis and the new safe-harbour/APA provisions remain distinct.

A comparable uncontrolled price needs reliable price comparability. A resale-price or cost-plus analysis needs an appropriate base and comparable gross result. A transactional net-margin analysis requires a suitable net indicator and tested transaction or party; a profit-split approach addresses its own circumstances. Do not choose a method merely because it gives the lowest taxable income. Assume a Nepal service company has operating revenue NPR 12,000,000 and correctly delineated operating costs NPR 10,000,000 for the tested services. Its operating profit is NPR 2,000,000. A profit-on-cost indicator is 20%, while a profit-on-revenue indicator is 16.67%. They are different measures. Comparing the 20% figure with a comparable margin calculated on sales would create an invalid conclusion even if each number is arithmetically correct.

Document the search period, activity, market, independence criteria and available data. Explain accepted and rejected observations and any reliable adjustment. Retain enough information for another reviewer to reproduce the process. An intercompany policy saying “all entities earn 3%” does not prove that 3% reflects Nepal’s transaction or comparable market behaviour. Keep the transfer-pricing conclusion connected to withholding, deduction and foreign-exchange files without treating it as approval of those separate issues. At year-end, reconcile the analysed segment with the statutory accounts and actual invoices. If facts changed, update the analysis instead of forcing accounts to match an old benchmark.